Hi, my name is Glen Bradford. My favorite thing in life at present is when I find a value opportunity that becomes an even better value. I’ve recently highlighted my favorite investment at present here at the Motley Fool. It is called Yellow Media(NASDAQOTH: YLWPF.PK). I actually drove past their Indy office earlier today. This is an opportunity that is very misunderstood based on my analysis, which I will provide for you today in all of its glory. The first and most important part of this discussion is that yes, this is a phone book company. Yes, the price has dropped 97% in the last 12 months. Check out the chart! As you can see, the stock price has fallen through the floor and is virtually at all time lows. Hated, unloved, and ignored. That is the sentiment. I am saying that as of today’s prices, an investment in Yellow Media offers over 2000% upside. Some would call this a speculative investment. Call it what you will, but I encourage you to poke holes in my research and my investment hypothesis and if you are unable to do so I encourage you to take an ownership stake for fun and profit.
My Investment Thesis
My investment hypothesis is simple. Based on my cash flow analysis, I see no risk of default. CCAA is off the table because they will meet their debt obligations as they come due. The market is pricing in bankruptcy. I believe that markets are not always rational, much like I think that people are not always rational. I can see how people who have owned from much higher prices would liquidate on any news. Any news is bad news when you’ve lost 80%+. That, combined with the company fulfilling their fiduciary responsibility of cutting the preferred dividends, which according to me is the most advantageous thing to do for common shareholders if the company stock drops below $2, has caused a sell-off that I find ripe with opportunity. On their latest call, they announced that they figured out how to save $125M that I wasn’t expecting them to save in taxes in FY 2012. Not only that, but they beat their own expectations this last quarter as well as my own.
I encourage you to look at my cash flow analysis, and to look at their financials and ask yourself, when exactly are they going to default on their debt? Do you see this happening? If you don’t and you agree that they will make all of their obligations then you, my new friend, have found what I believe to be the most undervalued company in the world as of February 10th 2012.
The Fear: Will Prices Go Lower?
I hope so! I would love to see another 50% drop in price. A lower price to me is a lower cost basis. Instead of seeing 2000%+ upside I would see 4000%+ upside upon this sort of drop in price. If things get worse and my cash flow analysis proves to be faulty, obviously the intrinsic valuation of the company would go down. Want a list of reasons why people have been selling the past 6 months, start here.
Short Analysis
There is a huge short position. I’ve graphed this here. This to me implies that the shorts are greedy. Power to them. If they can get people to sell out lower than they bought in, driven by the panic and fear that seems to be driving this stock, that’s great for the shorts. At this point though, it appears that the shorts should be covering at these bargain bin prices. They are not. Maybe they’re right and I’m wrong. I have been wrong before. It’s not impossible for me to be wrong this time as well.
Positives in the last call
- $125M Saved on Taxes.
- Beat their own EBITDA Expectations.
- Raising cash (Fulfilling their fiduciary responsibilities to common shareholders).
Why raising cash is advantageous?
Take a look at the fully diluted share count and the debentures. The debentures, if the company runs out of money, would be converted into over 1 Billion common shares at the present valuation. Thus, in light of this dilution, the company should prefer to withold dividends from the preferred shares, take out their full lines of credit, and maximize their cash on their balance sheet to make absolutely certain that they do not default on these debentures. That kind of dilution would be devastating and I think that the recent action acknowledges this and I think that it is not responsible to pay those dividends until the terms of the debentures are re-negotiated or the share price of commons goes above $2.
Combine this logic with the fact that their debt is trading at a fraction of face value. I believe at present, if they were able to buy back their debt at market prices as opposed to at par value, they could pay off 40% or so of their debt with their cash balance. That’s serious opportunity, and the company sees this and that’s why they are bringing in new board members that specialize in this. I’d be more than happy to assist with these decisions personally if called upon.
How I am playing it:
I don’t own the common. I don’t want to own the common when I can own Preferred Series 1 that I anticipate will be converted to common giving me a cost basis of 10 cents instead of the 15.5 cents that common is presently trading at. Mostly, I am buying Preferred Series 1, Preferred Series 2, Preferred Series 3, and Preferred Series 5. The dividends on these just got cut and the prices dropped huge! I love it. When I buy Preferred Series 5, I am buying $25 of Par value for around $1 as well as accruing a cumulative dividend yield of 172%. I know, it sounds absolutely ridiculous. The market is pricing in bankruptcy and the equity getting wiped out and as I mentioned earlier, my cash flow analysis just doesn’t see this being in line with the future reality of Yellow Media.
So there you have it. I wish that we could get lower prices so that I can make even more money. The net result of the last conference call was that my intrinsic valuation of the company went up, not down. Subsequently, the price has gone down significantly. When price goes down and the perceived worth goes up, I get greedy and buy. What would you have me do? If you’re interested in learning more, I advise you start here and here.
If you are looking to acquire a position, they have shares traded on the Toronto Exchange. You can open an account at Interactive Brokers and trade on that exchange after a currency conversion from USD to CAD on their platform. If you want to trade them from a US retail brokerage account, the tickers that you are interested in are:
- YLWPF – Common Shares
- YLWNF – Series 1 (A)
- YLWMF – Series 2 (B)
- YLPWF – Series 3 (C)
- YLMPF – Series 5 (D)
For me, my largest positions are in Series 1 and Series 5. If you want to see more analysis files, look here. That’s all for now, happy investing!
Below are the C & D payment schedules assuming that they turn their dividends back on and you get cashed out per the prospectus.
D
2012 – 4 1.725
2013 – 4 1.725
2014 – 4 1.725
2015 – 2 0.8625 + 25
Total Value on June 2015 $31.0375
C
2012 – 4 1.725
2013 – 4 1.725
2014 – 3 1.29375 + 25
Total Value on September 2014 $29.74375